Monday, August 9, 2010

Concept of elasticity of supply

Concept of elasticity of supply
Elasticity of supply like elasticity of demand is important in price theory.The change in price leads to the change in supply.The degree of change in supply due to the change in price is called elasticity of supply.To be more precise,the elasticity of supply can be defined as the proportionate change in quantity supplied to the proportionate change in price.
Hence,elasticity of supply is 2 or greater than unity.In general,since the price and the quantity move together,the elasticity of supply has positive more sing.When supply is elastic,the quantity supplied changes more than proportionately than change in price.On the other hand,if supply is inelastic,the quantity supplied changes less than proportionately than change in price.
The elasticity of supply may be different at different price ranges.Like demand curve,the supply curve is also perfectly elastic when it is a horizontal straight line and perfectly inelastic when it is a vertical straight line.In the figure, at portion AB,the supply is elastic and at portion BC,it is inelastic.
Figure also shows that the sellers do not at all below certain price such as OP.If price is OP,the sellers sell up to OQ1 quantity without high price.The price should be higher to sell more OQ1.Finally,the seller cannot and does not sell more than OQ2 however high the price may be.In the figure,at point B (where the supply curve is tangent to the line drawn from the point of origin),the elasticity supply is unity.When the supply curve is a straight line from the point of origin,the supply is unitary elastic throughout the length of the supply curve,whatever be the slope.

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